Third Parties (Rights Against Insurers) Act 2010 - are you ready?

This briefing is the first in a series of 3 briefings about the Third Parties (Rights Against Insurers) Act 2010 which we will be publishing over the next fortnight.

The pros and cons every claims professional needs to know – part 1

The Third Parties (Rights against Insurers) Act 2010 (2010 Act) is finally due in force on 1 August 2016. The 2010 Act is intended to address some of the shortcomings of the Third Parties (Rights against Insurers) Act 1930 (1930 Act) and will make it easier for third party claimants to bring claims against an insurer when an insured has become insolvent.

One of the key aspects of the 2010 Act is that it removes the need for multiple sets of proceedings by allowing the third party claimant to issue proceedings directly against the insurer and resolve all issues (including the insured's liability) within those proceedings. The third party will have the choice of using either the new method of single proceedings established by the 2010 Act, or the existing method of first establishing the liability of the insured before initiating proceedings against the insurer.

The Act also removes the need for restoring defunct bodies to the companies register who have been struck off it.

Finally the 2010 Act improves the third parties' rights to information about any insurance policies, allowing the third party to obtain information at an early stage about the rights transferred to it in order to enable an informed decision to be taken about whether or not to commence or continue litigation.

In summary: The pros and cons for insurers

The good news...

The bad news…

More bad news…

An opportunity to fight liability arguments without fear of waiving repudiation of the policy.

More opportunity for claimants to track down the relevant insurer.

The expense of overcoming all the legal hurdles will be much reduced for the claimant which will increase the likelihood of it bringing a claim against insurers.

The chance that with greater and earlier information the claimant will be put off suing the insurer in certain circumstances.

The chance that with greater and earlier information the claimant will be encouraged to sue the insurer in certain circumstances.

The burden on the insurer to provide early disclosure will increase and will come with the risk of adverse court orders for non-compliance.

Increased certainty of actual claims so a shorter period over which to have to hold reserves.

A chance for claimants to fulfil policy conditions in the insured’s place which might otherwise have afforded a coverage defence for insurers.

The insurer will have to put in place procedures to avoid non-compliance with disclosure requests and to make sure privileged documents are not inadvertently disclosed.

An improvement in the insurance industry’s reputation for treating claimants “fairly".

The opportunities for employing “low profile” tactics to put the claimant off suing the insurer will decrease significantly, or even disappear.

Possible arguments over what constitutes a third party's "reasonable belief" to entitle it to make a request for information under Schedule 1.

The 2010 Act explained in detail

The defendant insured (or possible insured) is defined in the Act as a "relevant person". (Section 1(5)(b)). This means a person or entity in one of the categories set out in the 2010 Act who incurs the liability against which it is insured, and who is insolvent in one of the ways specified by the 2010 Act. We use the definition of relevant person throughout this series of articles.

Section 1(3)

Section 1(3) is key to the new 2010 Act - it sets out that a third party claimant does not have to establish liability first against a relevant person to bring proceedings against insurers, although it cannot enforce those rights without having established that liability.

Section 2(2)

Section 2(2) allows a third party claimant to seek a declaration either as to the insured's liability to it and/or the insurer's potential liability to it. The declaration establishes liability against the insured so as to enable the third party to enforce the judgment against the insurer. However, the insured itself is only bound (section 2(10)) if he or she is a defendant to the third party's claim so the third party may wish to bring the insured into proceedings for that reason. (For example if there were any uninsured losses for which the claimant wanted to make a claim).

Sections 2(4) and 12(1)

Sections 2(4) and 12(1) provide that an insurer can rely on any defences under the policy except time bar, unless while an action against it is in progress the insured is able to rely on time bar. If the third party claimant has issued proceedings against the insured in time, the claimant will not be time barred from issuing fresh proceedings against the insurer for a declaration. If the insured's liability has already been established the third party's course of action against the insurer remains to have arisen at the time when the person established the liability of the insured. (Section 12(4)). So the insurer would have a final limitation period ending six years from the date that that course of action accrued.

Sections 4 to 7 and 19

Sections 4 to 7 have widened the number of insolvency situations which now make an insured a "relevant person". For example voluntary procedures are now included. The type of insured entity has also been widened so that for example it now includes an incorporated body. Section 19 gives the Secretary of State the power to change the meaning of "relevant person". These provisions are the ones which held up the 2010 Act for the last 6 years, but which were eventually amended and substituted via the Insurance Act 2015 (Sections 19, 20 and Schedule 2 of the Insurance Act 2015).

Section 8

Section 8 states that if the liability of an insured to a third party is less than the liability of the insurer to the insured the third party cannot claim the difference. This addresses the position that defendant costs are not payable to the claimant even if they were payable to an insured under the liability policy.

Section 9(2)

Section 9(2) is another key change in the 2010 Act. A third party claimant is now allowed to fulfil conditions in the policy on behalf of the insured. For example, the third party is allowed to fulfil obligations in relation to notification of a claim which could prevent the insurer from succeeding in a defence for non-notification. The enhanced disclosure requirements under the 2010 Act (more later) will mean that the claimant is provided with policy documentation at an earlier stage than before so it should be in a better position to identify such conditions that need to be met under the policy.

Section 9(5)

Section 9(5) and (6) establishes that "pay to be paid" clauses in the policy, which require the insured to have paid any liability before being indemnified, will not work.

Section 10

Section 10 clarifies that insurers have a right of set-off. For example they can deduct any unpaid premiums on the part of the insured from sums paid to the third party claimant.

Section 11

Section 11 introduces Schedule 1 which deals with the new information and disclosure to third parties requirements.

Sections 13 and 18

Sections 13 and 18 deal with jurisdiction within the UK. If the third party claimant is domiciled in a different place in the UK from the insurer, it has the choice of issuing in its own domicile regardless of what the contract says. Also, section 18 says that the Act will apply even where there are any foreign elements (for example if the insurer is overseas).

Section 14 (1) and (6)

Section 14 (1) and (6) clarify that the effect of the transfer of the insured's liability means that the third party claimant will only be able to recover directly from the insured and uninsured liability (unless the insurer becomes insolvent or the insurance policy provides a limit on funds to meet claims which fall in the same category as the third party's claim).

Section 15

Section 15 confirms that the Act does not apply to reinsurance, which was the same in the 1930 Act.

Section 16

Section 16 means that a third party can make a claim against insurance covered liabilities which are "voluntarily incurred" by the insured, such as legal expenses, health or car repair insurance.

Section 17

Section 17 clarifies that insurers cannot draft policies so as to avoid or terminate the insurance in the event of the insured becoming a relevant person or dying insolvent; any such provision will have no effect.

Section 20

Section 20 (2) Schedule 3 deals with the transitional arrangements for the 2010 Act coming into force on 1 August 2016. The 2010 Act is not retrospective. In most circumstances the 2010 Act will only apply if liability has been incurred after it comes into force or if the insured becomes a relevant person after it comes into force. If both events happen before it is in force, the 1930 Act will apply.

Information and disclosure for third parties (Section 11 and Schedule 1)

The current position under the 1930 Act regarding disclosure of documents and information to third parties (section 2 of the 1930 Act) is that the insured (or its liquidator etc) and the insurer have to give the third party at its request "such information as may reasonably be required by him for the purpose of ascertaining whether any rights have been transferred to and vested in him" by the 1930 Act. That duty includes "a duty to allow all contracts of insurance, receipts for premiums, and other relevant documents…to be inspected and copies to be taken thereof". No guidance is given in the 1930 Act on what "other relevant documents" might include.

The 2010 Act improves the position for third parties by not only letting them request information by notice in writing from the relevant person (Section 11, Schedule 1, paragraph 1(1)), but also from any other person who is able to provide the information (paragraph 1(2)(d)). This will include brokers as well as insurers and other persons authorised to hold policy information.

A third party will be able to request information from those who were employees or officers of an insured or from insolvency practitioners/official receivers who were acting before the insured became defunct (Schedule 1, paragraph 3).

The third party can only make a request under Schedule 1, para. 1 if it "reasonably believes" that the insured is a relevant person who has incurred a liability to it, or if the third party believes it has a right under the insurance contract (which would only exist if the insured was a relevant person). There is currently no guidance on what constitutes a reasonable belief and what rights the insured and the insurer might have if they consider that the belief is unreasonable. If this could not be resolved between the parties the third party would likely have to apply for a court order requiring the insurer (or any other person authorised to hold the information) to comply with the information request, (under Schedule 1, para. 2(3)) stating the reasons for its belief.

What information has to be disclosed?

The 2010 Act sets out what information has to be provided. This is in paragraph 1 (3)(a) and (b) of Schedule 1 of the 2010 Act and includes information on:

whether there is a contract of insurance that covers the supposed liability or might reasonably be regarded as covering it, and

if there is such a contract:

who the insurer is

what the terms of the contract are

whether the insured has been informed that the insurer has claimed not to be liable under the contract in respect of the supposed liability

whether there are or have been any proceedings between the insurer and the insured in respect of the supposed liability and (if so) relevant details of those proceedings

in a case where the contract sets a limit on the fund available to meet claims in respect of the supposed liability and other liabilities, how much of it (if any) has been paid out in respect of other liabilities

whether there is a fixed charge to which any sums paid out under the contract in respect of the supposed liability would be subject.

The definition of "relevant details of proceedings" which we have underlined above is in paragraph 1 (4) of the Schedule. In the case of court proceedings it is:

The name of the court.

The case number.

The contents of all documents served in the proceedings in accordance with rules of court or orders made in the proceedings, and the contents of any such orders.

In the in the case of arbitral proceedings it is:

The name of the arbitrator.

The contents of all documents served in the proceedings in accordance with the rules of the arbitration or orders made in the arbitral proceedings, and the contents of any such orders.

Time limit

Although the 2010 Act makes it clearer to insurers what they need to disclose, it also increases the burden on insurers by compelling them to provide the information within 28 days of receipt of the notice requesting it (or to say why they are not able to provide it). (Paragraph 2(1)).

Insurers will need to make sure they have procedures in place so as not to miss the 28 day deadline otherwise the third party can apply for a court order requiring the insurer to comply. The insurer would almost certainly have to pay the costs of the application for any order made against it.

Documents not in someone's control

The insurer will also have to give whatever particulars it can about documents which are not in its control but were at one time and which the insurer knows or believes are now in another person's control (paragraph 2 (2)). The kind of particulars the insurer would have to give in that situation would include the nature of the information and the identity of that other person who now has control of the information.

The interpretation of whether a person is able to provide information and when a document is in its control is set out in paragraph 7 of the Schedule as follows:

A person is able to provide information only if:

That person can obtain it without undue difficulty from a document that is in that persons control.

Where that person is an individual, the information is within that person's knowledge.

A document is in a person's control if it is in that person's possession or if that person has a right to possession of it or to inspect or take copies of it.

Disclosure and privilege

Paragraph 4 (1) of Schedule 1 confirms that the duties of disclosure and the rights of inspection are "the same as the corresponding duties and rights under Civil Procedure Rules of parties to court proceedings in which an order for standard disclosure has been made". This mechanism gives a third party claimant the opportunity to access the evidence which may help or hinder the insured’s defence, without having to restore the insured to the Register or to bring it into proceedings.

These requirements to disclose information are more or less the same as giving pre-action disclosure, although no ongoing duty of disclosure is required (paragraph 4(4)). However, it is not clear from the 2010 Act whether multiple requests for information could be made, which would be akin to an ongoing duty of disclosure, albeit not voluntarily instigated.

This duty of disclosure means that the insurer/broker will have to be alive to the identification of privileged documents and be careful not to allow inspection of them. Paragraph 2 (4) specifically says that "no duty [to disclose] arises…in respect of information as to which a claim to legal professional privilege …could be maintained in legal proceedings". This would include both legal advice privilege (confidential communications which pass between a client and his lawyer which have come into existence for the purpose of giving or receiving legal advice about what should prudently and sensibly be done in the relevant legal context) and litigation privilege (documents produced with the dominant purpose of use in actual or contemplated proceedings).

It is not always easy to tell whether a document is privileged so it would be preferable if a qualified lawyer (whether in-house or external) reviewed the documents which are disclosed to avoid inadvertent disclosure of privileged documents. Clearly there is a judgment to be made there between the level of risk and business resourcing needs. Where a party has inadvertently allowed inspection of a privileged document, the party who inspected it may only use it with permission of the Court; but the Court may give permission for its use if it decides that the mistake would not have been obvious to the person inspecting the documents.

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